Refer to the graph above. Assume that the economy is in initial equilibrium where AD₁ intersects AS₁. If there is an unanticipated increase in aggregate demand, then according to new classical economics the economy will self-correct with a: A) Movement from point B to point A B) Movement from point A to point B C) Shift from AS₁ to AS₂ D) Shift from AD₂ to AD₁

Question

Quizplus · Accepted Answer

According to new classical economics, an unanticipated increase in aggregate demand will result in a temporary increase in output and prices above the long-run equilibrium level. As prices increase, suppliers will increase their production, and the short-run aggregate supply curve will shift to the left until the economy returns to the long-run equilibrium level of output. This corresponds to a shift from AS₁ to AS₂, as shown in the graph. Neither movement from point A to point B nor from point B to point A is possible in the long run since both points are below the long-run equilibrium level. A shift from AD₂ to AD₁ would represent a decrease in aggregate demand, which is not consistent with the scenario.

Refer to the Graph Above